The report examines longevity risk under the retirement systems in the three countries. Better systems are needed to educate both individuals and policymakers about dangers of running out of money in retirement and the choices people make in spending their retirement assets. The shift away from Defined Benefit (DB) schemes to Defined Contribution (DC) schemes has switched the responsibility for managing longevity risk, alongside investment and inflation risk, onto the individual, however the impact of this switch has yet to be addressed by policy makers or properly understood by consumers.
The report identifies five challenges of managing longevity risk:
• Adequacy—Accumulating adequate savings over the course of one’s working life is crucial.
• Information—People need information on saving and managing savings, not just at the point of retirement, but leading up to and beyond it.
• Flexibility—It is critical that regulation is flexible to reflect individuals’ different retirement needs and their varying capacity to exercise choice.
• Equity—As far as possible, governments and regulators should ensure that the retirement income system is fair and that the concept of “fairness” is understood.
• Sustainability—Changes to a retirement income market should develop a long-term sustainable market.
Fiona Morrison, President of the IFoA comments,
“Research shows that individuals tend to underestimate how long they will live, which could cause both individual financial hardship and an increased burden on the benefit system. Access to adequate financial advice will be vital for savers to understand all their options and the risks of the choices they make.
“It is important to encourage people to save and make choices at retirement that can lead to a sustainable income. With the pensions freedoms that have come into effect in the UK recently, which allows pensioners to spend their retirement savings as they wish, the issue of longevity risk is a ticking time-bomb.“
Ken Hohman, International Secretary of the American Academy of Actuaries, comments,
“Longevity risk is not well understood by many people, and this lack of awareness can have significant implications for retirement income. We hope to bring attention to longevity risk and ways to address it, and to examine public policy approaches to improve lifetime income options for a secure retirement. This is part of a broader focus in the American Academy of Actuaries’ ongoing initiative on aging.”
Estelle Pearson, President of the Actuaries Institute Australia, said,
"This international paper will help inform the debate now underway here and overseas about how to ensure retirement income systems remain fair and equitable now and into the future. The variety of suggestions reinforces the need for governments to outline a clear vision for their retirement income system including a set of agreed objectives to ensure that concessions and payments are well targeted to avoid the poverty trap for future retirees”
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